Trends in banking

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Globally central banks following ultra loose   monetary policy

The major global policy initiative in 2020 was the decision of the leading central banks of the world to follow an ultra-loose monetary policy. The three leading central banks of the world, the US central bank Fed, the European Central Bank ECB, and Bank of Japan expanded their balance sheets by $ 8 trillion in 2020. The decision to flood the financial system with liquidity and keep interest rates near zero was the right response to tackle the severe recession triggered by the pandemic. But policies are fraught with externalities, i.e., unintended consequences. The unintended consequence of this unprecedented loose monetary policy was asset price inflation, i.e., prices of assets like stocks and gold shot up. This is the primary factor behind the ongoing global stock market bull run.

Record low interest rates in India boosting real estate and auto segments

In India, too, the RBI followed a very liberal monetary policy. Repo rate was cut by 115 bp to 4 %, reverse-repo to 3.35 %, and easy money was made available to borrowers. Consequently, loans became cheap. Housing loans are now available below 7 %. EMI per lakh of loan is the lowest during the last 20 years. This has turned out to be a major tailwind for the automobile and real estate sectors. The record sales of automobiles during October-December 2020 and the pick up in housing demand recently is the consequence of this cheap money policy. Reflecting the recovery in these sectors the Nifty Realty Index is up by 50 percent and the Nifty Auto Index is up by 18 percent in the last 3 months.

Trends in Indian banking

Meanwhile, the merger in India’s PSU banking sector is consolidating the banking sector. The merger of ten PSU banks into four large banks thereby reducing the total number of PSU banks into 12 from 27 is in keeping with the global trend of ‘small      number of large banks’ rather than ‘large number of small banks.’ This consolidation has created PSU banks, which are better capitalized with improving solvency and asset quality. But it will take a long time for the consolidated PSU banks to show improved profitability. A clear trend in Indian banking during the last several years is the top quality large private sector banks increasing their market share at the expense of the PSU banks. This trend is likely to gather momentum, going forward.

Customers of merged banks have to inform about the changes

The customers of the merged banks are being impacted in several ways. Customers’ account number, customer id, and bank IFSC are changing. So, customers will have to intimate third party entities like the Income Tax Department to get tax refunds, insurance companies to get maturity amounts, mutual funds to get redemption proceeds and dividends, and stockbrokers (bank account in Demat) for getting dividends. Customers of merging banks will have to act on this. It would be good if customers make a list of their bank loan accounts, insurance policies, mutual fund folios, demat accounts, etc so that they don’t miss out on any.

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